August 1, 2014 / 4:56 AM / in 5 years

BOJ's Kuroda defends upbeat economic view despite soft data

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda came out fighting on Friday, giving a spirited defence of the economy’s performance after a run of weak data, and reiterated his readiness to expand stimulus if inflation faltered on the path to his 2 percent target rate.

Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo July 15, 2014. REUTERS/Toru Hanai

“The BOJ is not aiming at achieving the price stability target of 2 percent temporarily. What it aims at is to achieve an economy in which inflation is about 2 percent on average year after year,” he said, signalling that the central bank will not exit from its ultra-loose stimulus any time soon.

“I would like to emphasize that...given the BOJ’s clear and strong commitment to the 2 percent inflation target, it is a matter of course the BOJ will make adjustments if necessary to ensure the target is met,” he said at a seminar.

He stressed that the BOJ will vigilantly monitor how a decline in real income affects consumer spending.

Kuroda said an increase in summer bonus payments to workers would help consumer spending recover from an increase in the sales tax in April, while labour and supply constraints meant companies were expected to keep raising wages.

“A positive cycle of output, income and expenditure is firmly in place, so we can say Japan’s economy continues to recover moderately as a trend.”

There were signs, he said, that companies were ready to increase domestic investment after holding back spending on plant and equipment during a prolonged period of deflation.

Kuroda was also upbeat on the outlook for exports, which have remained weak to the disappointment of policymakers, saying that the current sluggishness was due largely to cyclical factors such as a lack of vigour in emerging Asian markets.

“We expect exports to increase moderately reflecting improvements in overseas economies,” he said.

Such positive economic developments would help accelerate consumer inflation toward the BOJ’s price target, Kuroda said.

Kuroda tempered his confidence in the economy with a clear message that the BOJ is willing to take further steps if risk factors damage the outlook for growth and inflation.

“The BOJ will maintain quantitative and qualitative easing (QQE) to achieve 2 percent inflation in a stable manner. If risks arise in the midst of this process, we will adjust policy without hesitation and in doing so, we have various options still available,” he said in response to questions.

Since the launch of its extraordinary asset-buying scheme in April 2013, the BOJ has been scooping up about 70 percent of newly-issued government debt, including nearly all new 10-year benchmark bonds sold by the government.

With such large debt purchases by the BOJ, some economists argue there is little room to expand quantitative easing any further, while the scale of QQE has led to concerns that the BOJ is essentially bankrolling government spending - which could cause the government to lose interest in pursuing fiscal discipline.

Kuroda, however, rejected any notion that the BOJ was monetising government debt and called on the government to continue with a plan to lower its primary budget deficit, which excludes debt servicing costs and income from bond sales.

Japan’s fiscal situation is particularly acute because outstanding government debt is more than twice the size of its $5 trillion economy, the worst debt burden in the world.

Editing by Eric Meijer

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